Tuesday, February 28, 2017

"This is Crash Awareness Week at the Diary. If Team Trump stumbles, investors will be disappointed. Gradually…then all of a sudden…they will realize that the premise behind this rally was false. Already, we’re seeing signs of trouble…

Mystery solved: A growth spurt should raise the demand for capital. It should also increase labor rates and consumer prices. Interest rates should go up, too. So should corporate sales. (Compared to sales revenues, US stock prices are at their highest level- ever.) This suggests to investors a ‘rotation’- out of bonds and into stocks.

Since Election Day, the yield on the widely watched 10-year Treasury note rose from about 1.7% to about 2.4% as prices fell. And the US stock market shot up by about 10%. But now, bond yields are falling as prices once again rally. What’s going on? From His budget shall ye know Him. The future is still unknowable. But thanks to his proposed spending plans, the mystery known as Donald J Trump is largely solved. At least we can eliminate some possibilities. Now we know what he won’t do…

Cozy collusion: You already know the backstory. The Deep State- the ‘shadow government’ that runs the country no matter whom you vote for- makes the major decisions. Its goal is to hold on to, and expand, its power, using it to transfer real wealth to itself. You know, too, that real growth can only be achieved if the drag of debt and the Deep State is reduced.

President Trump’s ‘drain the swamp’ catchphrase was shorthand for getting the federales, the cronies, the zombies, and the Establishment insiders out of the way so the economy could function properly. We have a fair idea of what would have happened if Hillary Clinton had been elected: more of the same.

What we wondered about was whether Donald J Trump, a great disruptor, would break up the cozy collusion between government, crony industry, and zombie clients. We doubted he could do it, even if he wanted to. Deep State apparatchiks control the regulatory process. They control all major government agencies. They control Congress. They control the spies and the military-industrial complex. And they control the money.

Still, it looked for a moment as though Mr. Trump might mean business. The spooks appeared to be out to get him. Certainly, the mainstream media was. The spy agencies are the deepest part of the Deep State. Was Trump angling to reduce their power, as President Kennedy vowed to do before he was assassinated? Or was it just more of The Trump Show- a bit of theatre designed to flatter Trump’s ‘tough guy’ image?

No Deep State cuts: But now that the broad contours of the Trump budget plan are out in the open, we have our answer. Now we know… The Deep State has nothing to worry about. Its funding is secure. Even if President Trump succeeds in passing his budget intact, the money will still flow. There are to be no substantial cuts to the Deep State.

Reports the Associated Press: ‘The White House says President Donald Trump’s upcoming budget will propose a whopping $54 billion increase in defense spending and impose corresponding cuts to domestic programs and foreign aid. The result is that Trump’s initial budget wouldn’t dent budget deficits projected to run about $500 billion.’

Prices are jumping in Northern Virginia already, anticipating the flow of $54 billion more into the swamp. Restaurants and bars are already thinking of stretching hours and adding more expensive drinks. Housing in Fairfax and Loudoun counties is booming as builders take their McMansion plans out of the drawers. Investment advisers are recommending shares in crony military industries.

Today’s budget speech might fill in more details. But, in addition to calling for more money for the swamp, it is supposed to reaffirm ‘The Donald’s’ campaign pledge not to cut entitlements. And reports from the Republicans in Congress tell us that the new TrumpCare proposal will make only trivial cuts to the real cost of medical care and in no way cut the flow of wealth to the medical-insurance-legal complex.

Warfare and welfareMedical costs are already way out of line…and growing fast. Unlike any other government program, they are essentially uncontrollable under present conditions. The demand for drugs and medical procedures is almost unlimited…as long as someone else pays for them. Healthcare costs have been growing 10 times as fast as GDP over the last half-century. The combustibles in this explosion are complex.

But there is one critical element- one sine qua non- for the whole phenomenon: The person who benefits is not the same as the person who pays. Gains are realized individually; costs are suffered collectively.

The winners: zombies (often obese, alcoholic, diabetic, or chain-smoking…who receive pills and treatments they don’t pay for) and cronies (the medical, insurance, and legal insiders with a grip on the system).

The losers: taxpayers, young families, the general public, healthy people, young people, or those who simply don’t consume many medical services.

So let’s get this straight: The Deep State relies on two sources of income: fake money borrowed at ultra-low rates… and federal spending. The fake-money system will not even be challenged; federal spending will increase. There will be no cuts to entitlements. The swamp fauna with guns will get more money to buy more guns. There will be a little dry ground around the Environmental Protection Agency and other marginal malefactors… but enough only to pay for the increases in military spending.

So, what’s new? The Warfare State will get more money. The Welfare State will continue to grow based on past legislation. Neither will be cut back. The moneymen are still counting their shekels. The gunmen are still building their warplanes. And the con men are still running the show. The swamp won’t be drained. There will be no real boom.”

“Near the outskirts of the Small Magellanic Cloud, a satellite galaxy some 200 thousand light-years distant, lies 5 million year young star cluster NGC 602. Surrounded by natal gas and dust, NGC 602 is featured in this stunning Hubble image of the region.

Click image for larger size.

Fantastic ridges and swept back shapes strongly suggest that energetic radiation and shock waves from NGC 602's massive young stars have eroded the dusty material and triggered a progression of star formation moving away from the cluster's center. At the estimated distance of the Small Magellanic Cloud, the picture spans about 200 light-years, but a tantalizing assortment of background galaxies are also visible in the sharp Hubble view. The background galaxies are hundreds of millions of light-years or more beyond NGC 602.”

“I first read Soren Kierkegaard's “Fear and Trembling”* at about the same age as Kierkegaard was when he wrote it- thirty. The young philosopher was wrestling with his dark demons, including the death of his father, a sternly religious man who demanded absolute obedience from his son. He was torn between the opposing demands of faith and reason, certainty and doubt. In the opening pages of the book, he takes us with Abraham and Isaac on that terrible journey to Mount Moriah where God puts Abraham to a terrifying test of his faith.

What gives meaning to a life? Kierkegaard opted for belief. He wrote: “If there were no eternal consciousness in a man, if at the foundation of all there lay only a wildly seething power which writhing with obscure passions produced everything that is great and everything that is insignificant, if a bottomless void never satiated lay hidden beneath all- what then would life be but despair?”

This is the fear that caused Abraham to raise the knife over his beloved son. This is the valley of shadow that drove Kierkegaard to choose heaven over earth, the unseen over the seen. This is the dread of a mindless oblivion that causes so many to choose faith over reason, certainty over doubt.

In “Fear and Trembling,” Kierkegaard says that "faith begins where thinking leaves off." At the same age, Kierkegaard's almost exact contemporary, another solitary philosopher with a fierce moral sensitivity, Henry David Thoreau, wrote in his journal: “I have just heard the flicker among the oaks on the hillside ushering in a new dynasty. Eternity could not begin with more security and momentousness than the spring. The summer's eternity is reestablished by this note. All sights and sounds are seen and heard both in time and eternity. And when the eternity of any sight or sound strikes the eye or ear, they are intoxicated with delight.”

Some of us live our lives with our attention fixed on the hereafter. Others listen for the flicker's note in the distant oaks. No less than traditional theists, religious naturalists need to believe that we are not poised above a bottomless void. If we are lucky, we understand that love and loyalty are blessings that well up out of the dark night in mysterious ways. We feel no need to make the terrible journey to Mount Moriah when every element of creation, great and small, here and now, is filled with redeeming grace.”

"When your eyes are tired the world is tired also.When your vision has gone no part of the world can find you.Time to go into the dark where the night has eyesto recognize its own.There you can be sure you are not beyond love.The dark will be your womb tonight.The night will give you a horizonfurther than you can see.You must learn one thing:the world was made to be free in.Give up all the other worldsexcept the one to which you belong.Sometimes it takes darkness and the sweet confinement of your alonenessto learn anything or anyone that does not bring you alive

"When we spend all of our time complaining, we are in essence in constant destroy mode rather than building mode. We all know someone who has elevated the process of complaining to a high art. Sometimes funny, sometimes exhausting, these people have the ability to find a problem just about anywhere. In its more evolved form, complaining is simply the ability to see what's not working, in one's own life or in the external world, and it can be quite useful if followed to its natural conclusion-finding a solution and applying it. However, many of us don't get that far, and we find that complaining has become an end in itself. In small doses, this is not a big problem, but if complaining has become a huge part of our identities, it may be time to take a good look at how we are spending our energy.

Complaining is a person's way of acknowledging that they are not happy with the way things are. In a metaphorical way, when we complain or criticize, we are tearing down an undesirable structure in order to make room for something new. But if all we do is tear down, never bothering to summon the creative energy required to create something new, we are not fulfilling the process. In fact, we are at risk for becoming a stagnant and destructive force in our own lives and in the lives of the people we love. Another issue with complaining is that we sometimes tend to focus on other people, whom we can't change, as a way of deflecting attention from the one person we can change- ourselves. So transforming complaining into something useful is a twofold process that begins with turning our critical eye to look at things we can actually do something about, and then taking positive action.

When we find ourselves complaining, the last thing we need to do is get down on ourselves. Instead, we can begin by noticing that we are in the mode of wanting to make some changes. But rather than lashing out at somebody or an organization, we can look for an appropriate place to channel this energy- not our neighbor's house, but possibly parts of our own. Finally, we can ask ourselves the positive question of what we would like to create in the place of whatever it is we want to tear down. When we do this, we channel a negative habit into a creative process, thus using our energy to change the world around us in a positive way."

"Life passes like a flash of lightning, whose blaze barely lasts long enough to see. While the earth and sky stand still forever, how swiftly changing time flies across man's face. O you who sit over your full cup and do not drink, tell me- for whom are you still waiting?"

"The other day a friend contacted me, looking for an article that explained why centralization is bad. At first I was sure there had to be many, but I came up dry. Hence today's article. The odd thing about centralization is that people expect its bad aspects to be external things, like economic issues. But those aren’t the most important things. If the internal effects of centralization were recognized, and if we did something about them, the outer problems would vanish with them. But since everyone expects economic reasons, I’ll start there:

#1: Centralization disrupts price discovery. Disrupting price discovery… that sounds very “economic.” What it means is this: Whenever headquarters decides to meddle in business transactions, large sections of the marketplace are thrown out of order. The biggest offenders in this area were the 20th century's socialist states. I’m not sure precisely how many people died (mainly of starvation) from their economic “experiments,” but the number is in the range of 100 million.

Prices are not just numbers, you see; they are crucial information. How many separate prices, for example, go into the delivery of a pencil to your local store? Wood, graphite, lacquer, the pigment for the lacquer, the machines that mix and apply the lacquer, the machines that cut the trees into small pieces of wood, the trucks that move the materials, the cost of hiring the drivers, the cost of the tires, and so on, at great length. Once the political boss says, “Pencils should cost X,” all those costs are pushed and shoved accordingly. Changes have to be made, corners are cut, or scrambles for the extra few cents begin. The process is disrupted, and you can be sure that the quality of pencils will decline, fewer will appear, and/or the various suppliers will fight like crazy.

In the end, this delivers big problems, like the aforementioned starvation. A hundred million deaths, in just the 20th century, came from this. (And it wasn’t the bosses who starved; it was the poor and powerless. You know, the people whom the bosses “love and serve.”) So, disrupting price discovery is really, really bad.

#2: Centralization robs you. Centralization creates a group of people who eat (and generally grow rich) at the expense of everyone else. Every dollar that goes to politicians– for their very fine offices and cars and travel budgets and everything else– is money that is stolen from you and your neighbors.

#3: Central bosses try to show they're necessary. Did you ever notice that politicians are forever creating new fears? And why? Well, because solving those fears (even if they’re mostly imaginary, as most are) makes them seem necessary. From this we get any number of disasters, especially wars. Have you noticed that presidents become far more popular when they wage a war? Fear sells, and war is a tremendous spectacle. And it makes the centralizers look necessary. (Too bad about all those dead guys.)

#4: Centralization limits you. Centralized power solving our fears requires an ever-increasing number of laws, and each law is a restriction of some kind. Pretty soon, you can’t do half the things you could a couple of decades before. There’s a law for every problem and a department to solve it. Address it yourself and you’re likely to get hurt. So, to keep us safe from our professionally cultivated fears, your kid can’t run a lemonade stand without a license, your older aunt can’t watch the neighbor kids, and God help you if you try to give a lost child a ride home. Centralization is a straightjacket… restraining not just our bodies, but also our souls.

#5: Centralization kills cooperation. There are rules for everything. So, you can no longer cooperate with your neighbor because you enjoy it. No… you cooperate because it's commanded by law and you’ll be punished if you don’t. Have you noticed people yearning for the old days and talking about small, rustic communities where the people “still look out for each other”? Well, they’re right to yearn for that, because it’s a very healthy way to live. And it’s centralization that stole it from us.

#6: Centralization robs you of self-worth. Following on from #5 above: What happens inside you when you help people because you, by yourself, give a damn? I think we all know the answer: You become a better, happier, and more beneficial person. You know you did a good thing. And then you feel good about yourself. Every time you do “the right thing” because it’s mandated by law, you are being robbed of self-worth and self-improvement. And your friends and neighbors are robbed of your improved state.

Have We Had Enough? Perhaps you’ve thought of items that could be added to this list, but these six are at least a good start. The conclusion is this: Centralization is anti-human. It's the enemy of human goodness and progress. What supports centralization is a steady stream of fears, most of which are imaginary. So, have we had enough? Can we ditch this garbage now? Can we please start growing up?”

"Another night, another high for the Dow Jones. Are you excited, nervous or mystified by the US stock market’s seemingly relentless march higher? If you take the investor and adviser sentiment polls at face value, it’s ‘game on’. Bullish sentiment is reaching record levels.

Institutional money-managers are holding the least amount of cash in their portfolios…it’s ‘all in’. The Volatility Index (VIX) is showing the heart rate of traders is far from elevated. It’s flat-lining around the same level it was in early 2007. Ah, nothing like a little complacency to steady the nerves, is there? Bets are being taken on how soon the world’s most famous index will hit 30,000 points.

History (and a certain oracle from Omaha- Warren Buffett) tells us we should be fearful when others are greedy. But in the minds of market participants, there’s really been nothing to fear since Greenspan made this statement in response to the crash of 1987: ‘The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.’

Everyone knows the Fed has the market’s back with its quantitative easing and zero interest rate policy. Why worry? Join the party. But is the Fed as omnipotent as people think? Or are they just a gaggle of clueless PhD serial bubble-blowers who masquerade as serious, know-it-all banker types?

My money- secure in a dull, boring, unexciting, low-interest bank account- is on the latter. That’s my bet. The considered wisdom is: Don’t bet against the Fed.

Not all bets are certainties: Hillary Clinton was such a sure bet for the White House, Newsweek didn’t even wait for the official results before going to print. It was, as they say, a ‘fait accompli’.

Brexit. It was not going to happen. The Brits will never vote to leave the EU. Wanna bet on it?

What about that 2017 Super Bowl result? The New England Patriots were down for the count going into the fourth quarter…behind 28 to nine on the scoreboard. No team in modern NFL history has ever come back from a 19-point deficit going into the fourth quarter. What were the odds on the Patriots winning? But win, they did, tying up the game at full time and scoring the winning points in extra time. Who’da thunk that at the start of the fourth quarter?

Leicester City were rank outsiders to win the 2015–16 English Premier League. The team was so far off the bookies radar they started the season at the less-than-flattering odds of 5,000–1. Guess what? They won. Beating high-profile teams like Manchester United and Arsenal for the coveted trophy.

What are the odds of winning Lotto? Millions to one. Yet, every week, someone becomes an instant millionaire. Long odds mean that, on the balance of probabilities, it’s unlikely to happen…but it can, and sometimes does, happen.

Since 1987 we’ve seen three substantial market corrections (1987, 2000–2002 and 2008–09)- give or take. Each downturn resulted in roughly a 50% correction across the major indices. However, the tech-heavy NASDAQ index took a hit of nearly 80% after the dotcom bubble burst.

Judging by the latest VIX reading, the odds on a ‘garden variety’ correction of 50% are pretty low. Therefore, a correction of 80% is up there with Leicester City winning the title. No one is expecting it. Which is precisely why you should be worried. Mr Market loves it when everyone is looking the other way. That’s when the surprise is at its greatest. An 80% correction is the market’s Hannibal Lecter moment…a nice Chianti to go with his liver and fava beans.

Danielle DiMartino Booth- former Wall Street trader, financial columnist and adviser to the Governor of Federal Reserve Bank of Dallas for nine years- has written an excellent book, titled: "Fed Up- An Insider’s Take on Why the Federal Reserve Is Bad for America." By way of background, in 2006, her Dallas Morning News financial column regularly warned readers of the impending disaster in subprime lending. She’s one smart lady.

Here’s an extract from page 50 of ‘Fed Up’ (emphasis mine): ‘At the top of the [Fed] pyramid now sits Janet Yellen. Under her leadership, the Fed has struggled to extricate itself and the American economy from years of policy blunders that have positioned our economy on the precipice of another financial crisis that could dwarf that of 2008.’

Got that? Dwarf 2008! This is a former Fed insider. Not some shock-jock newsletter writer looking for a headline. She was there when Janet Yellen said in January 2007: ‘While the decline in housing activity has been significant and will probably continue for a while longer, I think the concerns we used to hear about the possibility of a devastating collapse- one that might be big enough to cause a recession in the U.S economy- have been largely allayed.’ And when Bernanke proclaimed to Congress in March 2007: ‘…problems in the subprime market seem likely to be contained.’

She has seen these bozos up close and personal. They are theorists. Academics that have never been in a real job…straight from university to the cloistered, secretive and unaccountable world of central banking. They’re completely removed from the impact of the decisions they make- guaranteed pensions for life, heavily-subsidized in-house cafeterias and dining rooms. They socialize with other pontificating PhD dreamers and schemers. These are the people market participants are trusting to have their back. I wouldn’t bet on it.

How could the next financial crisis dwarf 2008? Follow the maths.

Stock prices (I’m careful not to say values, because there is no value at this stage) are a function of earnings multiplied by a PE (price/earnings) ratio. Simple.

A company earning $1 billion X a PE of 15 = $15 billion.

If there are 15 billion shares on offer, each share is worth $1.

Not rocket science.

At present, the cyclically-adjusted PE (CAPE) is around 28x.

In 1982, at the start of the greatest bull market — and not so coincidentally, greatest credit expansion in history — the CAPE was 7x.

A fourfold expansion in the multiple applied to earnings.

Physics tells us that expansion is followed by contraction.

A company earning $1 billion on today’s CAPE of 28x = $28 billion.

Should the CAPE contract to its 1982 level of 7x, the company would be worth $7 billion…a 75% reduction in value, even though the company is still producing the same earnings.

But what happens if the market correction also causes a contraction in economic activity and earnings fall by 20%, to $800 million?

Earnings of $800 million multiplied by a CAPE of 7 = $5.6 billion…an 80% fall from $28 billion.

If PEs and earnings can rise, then logic says they can also fall. Nothing in markets is ever linear.

A CAPE of 7x (or less), while not common, is not without precedent — 1921, 1933 and 1982.

Earnings falling by 20% are also not an everyday event. But in times of financial upheaval, consumers tend to retreat…so it can happen. When you work through the numbers, it is possible to construct a feasible scenario where an outlier event can occur. The market bookies are completely discounting the prospect of a fall of this magnitude and, for that matter, of the market correcting at all, which is why the odds of a substantial correction are not as long as you think.

And remember, long-shots do win.

Think of Wall Street as the world’s biggest casino…which it is. If you adopt this mindset, the only chips you should have on the table are the ones you are prepared to lose heavily on. If you cannot afford to suffer a significant loss of capital, cash in your winnings and wait for the odds to improve in your favor. When is that? When no one can afford to go to the casino because they have no money left to play with.*" (* This link is from 2012, it's much worse now... - CP)

"Here’s an opportunity for you, dear reader… A Los Angeles spec house is on the market. It has seven bedrooms and 20,000 square feet of living space. It comes with a gold Lamborghini Aventador and a gold Rolls-Royce Dawn. You also get a wine cellar, a pool, and the usual claptrap amenities to which rich people are easy prey. The price? A hundred million dollars. Oh, and it comes with some of Damien Hirst’s oeuvres, considered by some to be ‘art’. The builder says he has another one under construction in Bel-Air that he plans to offer for $500 million.

Bombastic extravagance: What do we make of this? Who knows? But you don’t get this kind of bombastic extravagance at the bottom of a boom/bust cycle. You get it at the top. The risk of a crash and/or recession has been with us for years. But it seems to be intensifying. Real estate indices show prices back to their 2006 all-time highs. House flipping, too, is almost back where it was at the peak, with about 6% of sales attributed to flippers compared to about 7% in 2006.

For old commercial space, the picture is darkening fast. Bloomberg: "A tidal wave of store closures is about to hit the U.S., and the result could be catastrophic for hundreds of lower-tier shopping malls. J.C. Penney announced Friday that it would close up to 140 stores in the next couple months. That follows decisions by Macy’s and Sears to close a collective 218 stores in the first half of the year. Other mall-based stores including American Apparel, The Limited, Bebe, BCBG, and Payless have also recently announced that they are shutting down all or most of their stores."

Or take a look at the CAPE ratio for the S&P 500. It looks at stock prices relative to the average of the past 10 years of inflation-adjusted earnings to ‘smooth out’ year-to-year fluctuations in earnings. By this measure, stocks have only been more expensive in 1929, 1999, and 2007- all before major crashes.

There is particular extravagance in the tech market, where Fortune magazine counted 175 ‘unicorns’- unproven new companies said to be worth more than $1 billion- in 2016. One of them is appropriately named Farfetch. It is a London-based website hosting, well, clothes. According to The Economist, ‘Farfetch emphasizes its bricks and mortar boutique roots,’ allowing independent retailers to ‘keep their identity, while boosting their position in the market.’ It has never earned a dime…

Bad outlook: Meanwhile…S&P 500 profits have been going down for the last five consecutive quarters and are now lower than they were four years ago. And the outlook is bad. Whatever gains might be anticipated by lower business taxes will almost surely be overshadowed by higher labour costs and squeezed margins.

• In some industries- like agriculture and construction- undocumented immigrants do more than 10% of the work. Farmers will be especially hard hit. Their exports will be trimmed by a stronger dollar and retaliatory trade barriers. And their costs will rise as the lowest-cost labor disappears.
• The number of hours worked is going down, too. So are real wages.
• Half of Americans are already living paycheck to paycheck. With smaller paychecks, they will have to cut back spending fast.
• Auto-loan delinquencies are higher than they’ve been since 2008. Used car prices are 10% below their level three years ago.
• New car sales have stalled. Dealers have increased discounts by more than 20% in the last year.

Another sign of desperation: People with bad credit are signing up for more credit cards. This from the Fed: ‘Nearly half of all card closures in 2010 and 2011 belonged to borrowers with credit scores of 660 and below [with anything below 660 raising red flags], although they comprise only 33% of card borrowers. Reversing the sharp net decline in the number of credit cards during 2008-10, in recent years, the level of new card issuance to this group has been strong and is now approaching pre-recession levels.’

• And for the first time in 10 years, Federal Housing Administration mortgage delinquencies are rising.
• Student debt passed the $1.3 trillion mark.
• Consumer bankruptcies rose last month.
• The trade deficit is back to 2008 levels.
• And finally, inflation is rising. Officially, it is 2.5% for the last 12 months. Other measures put it much higher. Remember, the whole system depends on low interest rates…which depend on low inflation rates.

"America is going broke. That’s not an opinion or scare tactic- it’s a fact based on simple arithmetic. President Trump could be forced to face this fact as early as March 15, the date the latest U.S. debt ceiling suspension ends. Government debt is growing faster than the economy. If you extend that trend, and that’s exactly what official government projections do, you reach a point where higher taxes cannot cover interest expense, investors lose confidence in the bond market, and a death spiral of higher deficits, higher interest rates, and still higher deficits spins totally out of control.

This does not mean the end of America, let alone the end of the world. There are several ways out of the debt death spiral. It’s just that none of the ways out are easy, and all of them will cause massive losses to unprepared investors.

The ways to escape the debt dilemma are default, inflation, asset sales (“What do you bid for Yellowstone National Park?”), an IMF bailout, or some combination of these. Default imposes immediate losses on government bondholders, and mark-to-market losses on other bondholders as interest rates spike to account for increased risks. Even the possibility of default can push world markets into a tailspin or result in a credit downgrade for the United States, which happened in 2011 during that debt ceiling crisis.

Asset sales are a humiliation (just ask the Greeks). Besides, a lot of U.S. assets are not worth much to foreign investors if they cannot be removed, exploited, or used to generate cash-on-cash returns.

An IMF bailout means that the U.S. would give up partial control of its economy to an unelected, unaccountable globalist institution with unforeseen consequences such as the displacement of the dollar by the special drawing right (SDR) as the benchmark global reserve currency.

To understand why these dire outcomes are in the cards, one need only look at the U.S. debt to GDP ratio. Why is the debt-to-GDP ratio so important for understanding America’s unstable financial situation? The reason is that debt cannot be analyzed in isolation; it must be compared to the income available to support that debt.

It’s no different for a country than for an individual. If you owe $25,000 on a MasterCard that may or may not be a problem. If you make $20,000 per year, the $25,000 credit card debt will eat you alive with interest payments, and penalties and possibly cause you to file for bankruptcy. On the other hand, it you make $500,000 per year, you can probably pay off the credit card with what’s in your bank account. The point is you cannot decide whether $25,000 is a high or low debt load without looking at the income that can be used to pay it off.

The U.S. today has about $20 trillion in national debt. Is that high or low? If the GDP were $60 trillion, most economists would say the $20 trillion in debt was low and easily manageable. The debt-to-GDP ratio would be 33% (20/60 = 0.33). But, if the GDP were only $19 trillion, then the debt-to-GDP ratio would be 105% (20/19 = 1.05).

Which is it? Sad to say, it’s the latter. The U.S. debt is about $20 trillion, and U.S. GDP is about $19 trillion giving a debt-to-GDP ratio of 105%, a very dangerous level.

You can see this more clearly in the chart below. This was released in January 2017 by the Congressional Budget Office, or CBO, and shows the history of the U.S. debt-to-GDP ratio from 1790 to 2017 with projections out to 2050.

This chart is also useful because it shows that prior peaks in the U.S. debt-to-GDP ratio were associated with major wars, specifically the Revolutionary War, the Civil War, World War I and World War II. After each war, the debt-to-GDP ratio declined substantially. Basically, the U.S. went into debt to fight and win major wars, and then reestablished sound national finances after the wars were over.

Interestingly, the chart shows that the last time the U.S. was debt free was in 1836 during the administration of President Andrew Jackson. President Jackson was also famous for abolishing the Second Bank of the United States, which was the U.S. central bank of its time. Jackson believed in no debt and no central bank.

With the exception of the Civil War and its aftermath, the U.S. had very low debt-to-GDP ratios and no central bank from 1836 to 1913. After 1913, the U.S. again had a central bank, this time called the Federal Reserve. U.S. debt-to-GDP ratios have been considerably higher ever since.

Despite its usefulness, this CBO chart is distorted because it shows so-called “Federal Debt Held by the Public.” This requires some explanation. Federal debt held by the public excludes federal debt held by government agencies, such as the Social Security Administration, in trust for recipients of various entitlement programs such as retirement, disability and survivors’ benefits. But, there is no sound basis for excluding that debt. Those benefits will certainly have to be paid (neither political party is calling for entitlement reform right now), and the government securities held in trust are there to provide the means of payment. The idea that entitlements might be revised and that the debt should not be counted as “public” debt is pure fiction.

That fiction also distorts the historic comparisons. The first chart shows the historic peak debt-to-GDP ratio was about 110% in 1945 at the end of World War II, and that the current ratio is about 75%. However, there was no significant amount of non-public debt in 1945 because the entitlement programs were new, off-budget, and cash-flow positive.

The next chart offers a more recent historical perspective than the CBO chart, dated from 1940–2017. It also offers a more realistic picture of the actual debt-to-GDP situation. This chart includes all government debt including that held by government agencies to pay benefits. The comparison is more apples-to-apples.

What this chart shows is the same World War II peak (about 121%), and that the current ratio is 105% — much higher than the 75% shown in the official CBO chart above.

This chart also shows the steady rise of the debt-to-GDP ratio from the lows of about 33%, achieved in the 1970s during the Nixon, Ford, and Carter administrations, to the dangerous high of 105% reached in 2017. The modern era of exploding national debt really begins with Ronald Reagan and continues today with the newly installed Trump administration. That is the history we turn to now.

The fiscal policy story of the period 1981 to 2017 can be summed up in a curious phrase: Feed-the-beast, starve-the-beast. The beast, of course, is the U.S. government with its voracious appetite for taxpayer funds. Feeding the beast refers to huge deficits and expanded spending. Starving the beast refers to spending cuts and fiscal prudence. These alternating bouts of spending increases and spending cuts are amplified or mitigated by tax cuts and tax increases. These make the deficits worse, or in some cases better, than they would be based on spending alone.

The problem is that the feed-the-beast, starve-the-beast strategy has been used by successive administrations to tie the hands of their successors with mixed results. It is this political dynamic, combined with the simple math of deficits and growth, which has led to the dangerous state the U.S. finds itself in today.

The culmination of almost forty years of fiscal irresponsibility (with a few exceptions) has now been dumped in Donald Trump’s lap. The debt trap is not Donald Trump’s fault, but it will be his issue to resolve because it is now reaching a critical state. This debt wall may be the defining policy issue of the Trump administration although it is receiving little attention at the moment. As the debt ceiling talks approach, you’ll hear more about this in the mainstream. A bond market revolt, borderline hyperinflation or a deflationary debt implosion are all possible outcomes.”

Monday, February 27, 2017

"Sure, being in a good mood changes the way you see the world, but it also looks like it changes the way the brain works. Dr. Adam Anderson, an Assistant Professor of Psychology at the University of Toronto, has been using functional MRI to look at how the mood we're in affects the way the brain works. Anderson had people look at a picture that either put them in a good mood or a bad mood, and then had them do a simple task that measured their attention. At the same time, he looked at their brain activation levels with the fMRI scans. It turns out that people in a positive mood took in more information about the world around them, while people in a negative mood took in less. Anderson says the brain is like a camera and the particular mood we're in is kind of like a lens that determines how much of the world we see. The idea is that the way we perceive the world- and therefore think about it- is heavily influenced by our emotional state.

A University of Toronto study provides the first direct evidence that our mood literally changes the way our visual system filters our perceptual experience suggesting that seeing the world through rose-colored glasses is more biological reality than metaphor. "Good and bad moods literally change the way our visual cortex operates and how we see," said Professor Adam Anderson of psychology. "Specifically our study shows that when in a positive mood, our visual cortex takes in more information, while negative moods result in tunnel vision. The study appears in the 'Journal of Neuroscience.'

The U of T team used functional magnetic resonance imaging to examine how our visual cortex processes sensory information when in good, bad and neutral moods. They found that donning the rose-colored glasses of a good mood is less about the color and more about the expansiveness of the view.

The researchers first showed subjects a series images designed to generate a good, bad or neutral mood. Subjects were then shown a composite image, featuring a face in the centre, surrounded by "place" images, such as a house. To focus their attention on the central image, subjects were asked to identify the gender of the person's face. When in a bad mood, the subjects did not process the images of places in the surrounding background. However, when viewing the same images in a good mood, they actually took in more information- they saw the central image of the face as well as the surrounding pictures of houses. The discovery came from looking at specific parts of the brain- the parahippocampal "place area"- that are known to process places and how this area relates to primary visual cortical responses, the first part of the cortex related to vision. Images from the experiment are here.

"Under positive moods, people may process a greater number of objects in their environment, which sounds like a good thing, but it also can result in distraction," said Taylor Schmitz, a graduate student of Anderson's and lead author of the study. "Good moods enhance the literal size of the window through which we see the world. The upside of this is that we can see things from a more global, or integrative perspective. The downside is that this can lead to distraction on critical tasks that require narrow focus, such as operating dangerous machinery or airport screening of passenger baggage. Bad moods, on the other hand, may keep us more narrowly focused, preventing us from integrating information outside of our direct attentional focus.

Dr. Adam Anderson remarked that the "good mood" subjects also demonstrated excellent creative problem-solving. Conversely, when a "bad mood" group was challenged, they tended to see the problem all in the same way, which short-circuited the possibolity of developing a novel or innovated approach. It does then suit the PTB to keep us continually upset and stressed, and unable to approach our dilemmas in any way except what we already know.”

The falcon cannot hear the falconer;Things fall apart; the center cannot hold;Mere anarchy is loosed upon the world,The blood-dimmed tide is loosed, and everywhereThe ceremony of innocence is drowned;The best lack all conviction, while the worstAre full of passionate intensity.Surely some revelation is at hand;Surely the Second Coming is at hand.The Second Coming! Hardly are those words outWhen a vast image out of Spiritus MundiTroubles my sight: somewhere in sands of the desertA shape with lion body and the head of a man,A gaze blank and pitiless as the sun,Is moving its slow thighs, while all about itReel shadows of the indignant desert birds.The darkness drops again; but now I knowThat twenty centuries of stony sleepWere vexed to nightmare by a rocking cradle,And what rough beast, its hour come round at last,Slouches towards Bethlehem to be born?"

"We need a new civil war like we need a hole in the head. But that’s just it: America has a hole in its head. It’s the place formerly known as The Center. It didn’t hold. It was the place where people of differing views could rely on each other to behave reasonably around a touchstone called the National Interest. That abandoned place is now cordoned off, a Chernobyl of the mind, where figures on each side of the political margin fear to even sojourn, let alone occupy, lest they go radioactive.

Anyway, the old parties at each side of the political transect, are melting down in equivalent fugues of delusion, rage, and impotence- as predicted here through the election year of 2016. They can’t make anything good happen in the National Interest. They can’t control the runaway rackets that they engineered in legislation, policy, and practice under the dominion of each party, by turns, going back to Lyndon B. Johnson, and so they have driven themselves and each other insane.

Trump and Hillary perfectly embodied the climactic stage of each party before their final mutual sprint to collapse. Both had more than a tinge of the psychopath. Trump is the bluff that the Republicans called on themselves, having jettisoned anything identifiable as coherent principles translatable to useful action. Hillary was an American Lady Macbeth attempting to pull off the ultimate inside job by any means necessary, her wickedness so plain to see that even the voters picked up on it. These two are the old parties’ revenge on each other, and on themselves, for decades of bad choices and bad faith.

The anti-intellectual Trump is, for the Right, the answer to the Intellectual-Yet-Idiots (IYIs) that Nassim Taleb has so ably identified as infesting the Left. It is a good guess that President Trump has not read a book since high school, and perhaps never in his entire life. But are you not amazed at how the IYIs of the Left have savaged the life-of-the-mind on campus, and out in the other precincts of culture where free inquiry once flourished? From the craven college presidents who pretend that race-segregated “safe spaces” represent “inclusiveness,” to The New York Times editors who pretend in headlines that illegal immigrants have done nothing illegal, the mendacity is awesome.

Something like this has happened before in US history and it may be cyclical. The former Princeton University professor and President, Woodrow Wilson, dragged America into the First World War, which killed over 200,000 Americans (nearly four times as many as Vietnam) in only eighteen months. He promulgated the Red Scare, a bit of hysteria not unlike the Race and Gender Phobia Accusation Fest on the Left today. Professor Wilson was also responsible for creating the Federal Reserve and all the mischief it has entailed, especially the loss of over 90 percent of the dollar’s value since 1913. Wilson, the perfect IYI of that day.

The reaction to Wilson was Warren Gamaliel Harding, the hard-drinking, card-playing Ohio Main Street boob picked in the notorious “smoke-filled room” of the 1920 GOP convention. He invoked a return to “normalcy,” which was not even a word (try normality), and was laughed at as we now laugh at Trump for his idiotic utterances such as “win bigly” (or is that big league?). Harding is also known for confessing in a letter: “I am not fit for this office and should never have been here.” Yet, in his brief term (died in office, 1923), Harding navigated the country successfully through a fierce post-World War One depression simply by not resorting to government intervention.

Something like the same dynamic returned in 1952 when General Eisenhower took over from Harry Truman and the defeated Democratic nominee Adlai Stevenson quipped, “The New Dealers have been replaced by the car dealers.” Ha! If he only knew! After all, who was on board as Ike’s Veep? None other than Tricky Dick Nixon, soon to be cast as America’s quintessential used car salesman.

Well, those were the days, and those days are over. So much has gone wrong here in the past thirty years and the game of salugi being played by the Dems and the GOP is not helping any of it. And that is why the two parties are heading toward extinction. We’re in the phase of intra-party factional conflict for now. Each party has its own preliminary civil war going on. The election of Obama era Labor Secretary and party hack, Tom Perez, as DNC chair yesterday has set the Bernie Sanders Prog troops into paroxysms of animadversion. They’re calling out all up-and-down the Twitterverse for a new party of their own. Trump faces his own mutineers on the Right, and not just the two cheerleaders for World War Three, John McCain and Lindsey Graham. Coming out of the Conservative CPAC meeting last week, just about his whole agenda was written off as (cough cough) politically impractical by the poobahs in attendance: reform-and-replacement of the Affordable Care Act, tax reform, the promised massive infrastructure-building stimulus orgy, the border wall, the trade blockages.

Anon, comes the expiration of the current debt ceiling, at around $20 trillion, in mid-March. Do you imagine that the two parties warring with each other in congress will be able to come to some resolution over that? Fuggeddabowdit. The Democrats have every incentive to let President Trump stew in this fatal brine like a Delancey Street corned beef. What it means, of course, is that the US Treasury runs out of ready cash in mid-summer and some invoices just don’t get paid, maybe even some bigly ones like social security checks and Medicare bills. Won’t that be a spectacle? That’s where Trump becomes a political quadriplegic and the voters start jumping off the dying parties like fleas off of two dead dogs.

By then, plenty of other mischief will be afoot in the world, including the fractious outcome of elections in France and the Netherlands, with the European Union spinning into its own event horizon, and currency instability like the world has never seen before. Enjoy the remaining weeks of normality.”

"For more than 100 years global debt levels have been rising, and now we are potentially facing the greatest debt crisis in all of human history. Never before have we seen such a level of debt saturation all over the planet, and pretty much everyone understands that this is going to end very, very badly at some point. The only real question is when it will happen. Many believe that the current global debt super cycle began when the Federal Reserve was established in 1913. Central banks are designed to create debt, and since 1913 the U.S. national debt has gotten more than 6800 times larger. But of course it is not just the United States that is in this sort of predicament. At this point more than 99 percent of the population of the entire planet lives in a nation that has a debt-creating central bank, and as a result the whole world is drowning in debt.

When people tell me that things are going to “get better” in 2017 and beyond, I find it difficult not to roll my eyes. The truth is that the only way we can even continue to maintain our current ridiculously high debt-fueled standard of living is to grow debt at a much faster pace than the economy is growing. We may be able to do that for a brief period of time, but giant financial bubbles like this always end and we will not be any exception.

Barack Obama and his team understood what was happening, and they were able to keep us out of a horrifying economic depression by stealing more than nine trillion dollars from future generations of Americans and pumping that money into the U.S. economy. As a result, the federal government is now 20 trillion dollars in debt, and that means that the eventual crash is going to be far, far worse than it would have been if we would have lived within our means all this time.

When you add all forms of debt together, America’s debt to GDP ratio is now about 352 percent. I think that the following illustration does a pretty good job of showing how absolutely insane that is: If your brother earns $100,000 in annual income and borrowed $10,000 on his credit card, he could consume $110,000 worth of stuff. In this example, his debt to his personal GDP is just 10%. But what if he could get more credit year after year and reached a point where his total debt reached $352,000 but his income remained the same. His personal debt-to-GDP ratio would now be 352%.

If he could borrow at super low interest rates, maybe he could sustain the monthly loan payments. Maybe? But how much more could he possibly borrow? What lender would lend him more? And what if those low rates began to rise? How much debt can his $100,000 income cover? Essentially, he has reached the end of his own debt cycle."

The United States is certainly not alone in this regard. When you look all over the industrialized world, you see similar triple digit debt to GDP figures.

When this current debt super cycle ultimately ends, it is going to create economic pain on a scale that will be unlike anything that we have ever seen before. The following comes from King World News: "That is the inevitable consequence of 100 years of credit expansion from virtually nothing to $250 trillion, plus global unfunded liabilities of roughly $500 trillion, plus derivatives of $1.5 quadrillion. This is a staggering total of $2.25 quadrillion. Therefore, the question is not what could go wrong since it is guaranteed that all these liabilities will implode at some point. And when they do, it will bring misery to the world of a magnitude that no one could ever imagine. It is of course very difficult to forecast the end of a major cycle. As this is unlikely to be a mere 100-year cycle but possibly a 2000-year cycle. It is also impossible to forecast how long the decline will take. Will it be gradual like the Dark Ages, which took 500 years after the fall of the Roman Empire? Or will the fall be much faster this time due to the implosion of the biggest credit bubble in world history? The latter is more likely, especially since the bubble will become a lot bigger before it implodes."

Of course much of the globe is already in the midst of a horrible economic crisis. Brazil is in the middle of their worst recession ever, and people are literally starving in Venezuela. A new round of debt problems has erupted in Europe, with Greece, Portugal and Italy being the latest flashpoints.

Just like in 2007, many are mocking the idea that the a major economic downturn is coming to the United States. They believe that the ridiculously high stock market valuations of today can stick around indefinitely, and they are putting their faith in politicians. But it won’t be too long before a new economic crisis begins in America and the kind of civil unrest that I portray in “The Beginning Of The End” erupts all across the country.

I just don’t understand why more people cannot see this. Government debt, corporate debt and consumer debt have all been growing much, much faster than the overall economy. Can someone please explain to me how that could possibly be sustainable in the long-term?

Someone that I considered to be a mentor but that has since passed away once said that things would seem like they would be getting better for a little while before the next crash comes. And it turned out that he was precisely correct. We are in a season of time when economic conditions have appeared to be getting a little bit better in the United States, and this has blinded so many people to the truth of what is about to happen to us."

"A bright spiral galaxy of the northern sky, Messier 63 is about 25 million light-years distant in the loyal constellation Canes Venatici. Also cataloged as NGC 5055, the majestic island universe is nearly 100,000 light-years across, about the size of our own Milky Way. Known by the popular moniker, The Sunflower Galaxy, M63 sports a bright yellowish core and sweeping blue spiral arms, streaked with cosmic dust lanes and dotted with pink star forming regions.

Click image for larger size.

This deep exposure also reveals an enormous but dim arc extending far into the halo above the brighter galactic plane. A collaboration of professional and amateur astronomers has shown the arc to be consistent with the stellar stream from a smaller satellite galaxy, tidally disrupted as it merged with M63 during the last 5 billion years. Their discovery is part of an increasing body of evidence that the growth of large spirals by cannibalizing smaller galaxies is commonplace in the nearby Universe."

"Are we truly alone With our physics and myths, The stars no more Than glittering dust, With no one there To hear our choral odes?"

"This is the ultimate question, the only question, asked here by the Northern Irish poet Derek Mahon. It is a poem of exile, from the ancient familiar, from the sustaining myth of rootedness, of centrality. A poem that the naturalist can relate to, we pilgrims of infinite spaces, of the overarching blank pages on which we write our own stories, our own scriptures, having none of divine pedigree. Yes, we feel the ache of exile, we who grew up with the sustaining myths of immortality only to see them stripped away by the needy hands of fact. We scribble our choral odes. Who listens? We speak to each other. Is that enough? Having left the home we grew up in, we make do with where we find ourselves, gathering to ourselves the glittering dust of the here and now.

Are we truly alone? Mahon again:

"If so, we can start To ignore the silence Of infinite space And concentrate instead on the infinity Under our very noses- The cry at the heart Of the artichoke, The gaiety of atoms."

Better to leave the blank page blank than fill it with sentimental hankerings for home, with those prayers of our childhood we repeated over and over until they became a hard, fast crust on the page. Incline our ear instead to the faint cry that issues from the world under our very noses, from there, the tomato plant on the window sill, the ink-dark crow that paces the grass beyond the panes, the clouds that heap on the horizon- the dizzy, ditzy dance of atoms and the glitterings of stars.”

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